Championx Corp - M&A situation with large upside optionality

1. M&A
ChampionX Corporation (NYSE: CHX)
August 23, 2020
Company Profile
ChampionX Corporation is a global leader in chemistry solutions and highly
engineered equipment and technologies that help companies drill for and produce
oil and gas safely and efficiently around the world.
Share Summary
Share Summary Aug 23, 2020
Market Price 9.86
Shares Out (mil) 200
Market Cap (mil) 1,970
Net Debt (est) (930)
EV 2,900

2. Spin-Off
Dover Corporation completed the spin-off of its upstream energy businesses
(Wellsite) in May 2018. Company was named Apergy
Merger with Ecolab business
On June 3, 2020, Apergy and Ecolab completed a Reverse Morris Trust transaction
in which Ecolab transferred their upstream energy business to Champion X Holding
(the combined company) and distributed all of the shares of legacy ChampionX
common stock to certain Ecolab stockholders. In association with the completion
of the merger, the company has changed its name from Apergy Corporation to
ChampionX Corporation, and common shares began trading on the New York Stock
Exchange under the symbol "CHX".
Valuation
Financials
Main Financials Pro-Forma Q2 2020 x4 Trough 2016 *
Sales 2,459 2,936
Adj EBITDA 251 400
FCF * 111 242
* (1) Slide 10 of company's presentation
https://investors.championx.com/static-files/c2426286-e7ed-4761-b5c9-3e9253041134
(2) Free Cash Flow for 2020 is estimated using 44% conversion ratio of EBITDA to FCF
(this was the ratio during 2016-2019 period)
Valuation Ratios
Valuation Pro-Forma Q2 2020 x4 Trough 2016 *
P/S 0.80 0.67
EV/EBITDA 11.55 7.25
FCF Yield 5.6% 12.3%

3. Estimated Valuation - 3 years
EBITDA scenario
Estimated valuation - 3
years
Q2 annualized
with synergies
Q2 annualized
with 20%
improvement
and synergies
Trough '16
plus synergies
'19 plus
synergies
Net Debt -930 -930 -930 -930
3-year FCF 332 398 726 1,086
EBITDA 326 376 475 675
EV/EBITDA multiple 9.0 9.0 9.0 9.0
EV 2,936 3,388 4,275 6,075
Market Cap 2,337 2,856 4,071 6,231
Shares outstanding 200 200 200 200
Market Price 11.70 14.29 20.37 31.18
3-year potential upside 19% 45% 107% 216%
Annual upside (est) 6% 15% 36% 72%
* Valuation assumptions:
- FCF conversion rate is assumed to be 44% of EBITDA (which was the average during 2016-2019
period) and is not adjusted for synergies

4. Story Elements
 Complication stage passed - spin-off and subsequent merger during very
unfavorable period in the market (covid-19)
 Expect to deliver $50 million of annualized savings in addition to synergies
expected from the merger ($35 mil of run rate cost synergies exiting 2020)
 Major part of revenue is production focused (84% of revenues)
 High recurring production revenue (70% of revenues)
 Company is well positioned for downturns
 Classic event-driven setup in a volatile market with significant dislocations
Recommendation
We believe that Apergy spin-off and subsequent merger with a division of Ecolab
provides investors with an opportunity to participate in a volatile and risky segment
of the market (energy) in a reasonably calculated way with large upside optionality
www.etalon-capital.com